In its continued efforts to fine-tune details of the Korean short sale regime that came into force with the lifting of the short sale ban on March 31, 2025, the Financial Services Commission (the “FSC”) recently announced proposed amendments to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “FSCMA”).
Together with the amendment to relevant provisions in the FSCMA which was previously announced in September 2024 (Link), the amended Enforcement Decree will become effective as from April 23, 2025 and provides certain details regarding the non-pecuniary sanctions outlined in the amended FSCMA for certain unfair trading activities including short sale breaches, as further described below.
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Restriction on Trading of Financial Investment Products
Under the amended FSCMA and its Enforcement Decree, the FSC may prohibit a person who has engaged in naked short sale or certain prescribed unfair trading activities (i.e., leakage or use of material non-public information related to listed derivatives; insider trading; market manipulation; fraudulent unfair trading; market disruption; and acquisition of securities through public offering in breach of the prohibition imposed on short sellers) (the “Restricted Person”) from trading financial investment products for that person’s account for up to five years.
In case a Restricted Person violates the FSC’s trading restriction order(s), the FSC may impose an administrative fine of up to KRW 100 million and also additional civil penalties for failure to comply with the FSC’s trading restriction order(s).
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Restriction on Appointment as an Executive
The FSC may also prohibit a Restricted Person who is an individual from being appointed or serving as an executive of a listed Korean company or a Korean financial company (i.e., bank, securities company, insurance company, and mutual savings bank), for up to five years.
In case a listed company or a financial institution appoints a Restricted Person as an executive or fails to dismiss an executive who becomes a Restricted Person, in each case in violation of the FSC’s prohibition order(s), the FSC may formally request the dismissal of the concerned individual to the relevant company and/or impose an administrative fine of up to KRW 100 million for failure to comply with the FSC’s prohibition order(s).
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Suspension of Trading Accounts
In case there are justifiable grounds and a need to temporarily cease certain financial transactions, the FSC may instruct financial companies to suspend all or some of the trading account(s) suspected of being utilized for naked short sale or certain prescribed unfair trading activities described above for a period of up to one year.
A financial company which fails to comply with the FSC’s suspension order(s) may be subject to an administrative fine of up to KRW 100 million.
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With the recent lifting of the short sale ban in Korea and implementation of new rules and systems, it may take some time for market participants to familiarize themselves with new regulatory landscape and requirements, including the operation of newly the introduced Naked Short-Selling Detection System. During such transition period, it may be necessary to actively reach out to the Korean financial regulators and the Korea Exchange for clarification of key issues that are critical to the implementation of the requisite systems and procedures to continue short sale activities in compliance with the Korean short sale rules.
